Defence Strategy: SETTLE OR FIGHT

For some defence lawyers, the decision to settle a case or fight it to the end is a matter of measuring risk. For others, settling is a risk unto itself, putting the industry at the mercy of the plaintiff’s bar.

Much like insurance rates, the decision to settle or fight a case swings on a pendulum.

On one side is the draw to fight, the willingness to battle a case to the end. On the other side is the draw to early settlement — the side on which the industry currently sits.

Some senior counsel in the defence bar are speaking out against settling. They suggest that, without a fight, the plaintiff bar will keep getting stronger and no new case law will be written. On the basis of this law, the industry will be at the mercy of class action lawsuits.

Advocates of early settlement point to the necessity of risk management — the need to weigh the pros and cons of fighting to the bitter end — and the financial ramifications and the implications of a decision that might not be the most beneficial.

Assessing the risk can be an arduous task in and of itself: How much will it cost to settle the case? How much will it cost to fight the case? How long will it take to bring the case to court versus the amount of time it will take to settle? What happens if the ideal decision is not the eventual outcome? What will the impact be then? Defence lawyers and insurance companies must consider all of these things when determining which way to proceed on a case.

Exercise in risk management

Essentially the entire procedure is an exercise in risk management. This includes consideration of whether to settle a case, go to trial, move forward to appeal, or how to proceed with a class action.

The lawyer carries on what begins as a risk assessment process with claims adjusters every time a claim comes in. All the facts are obtained, weighed and then a decision is made. But the risk management does not end with a decision by the lawyer; it carries on until a judge or a jury makes a decision.

“The reality of it is that the resolution of these things through the litigation process is a risk management exercise in and of itself,” Christopher Dunn, a partner with defence firm Dutton Brock, says.

Financial Implications

In each and every case money is involved — the money needed to go to trial, the money needed to settle a case, the potential money lost if the decision favours the plaintiff or the money saved if the judge rules with the defence.

Because of the financial ramifications, including the cost and risk associated with a trial, only a small number of cases actually reach a trial.

“Unfortunately, our goal is often commercial as opposed to legal,” Dunn says.

Even when a case appears solid, judges have been known to make decisions that seem to fly in the face of precedent, which can severely impact a insurance company financially.

Decisions of the courts

Ultimately, no matter how much one prepares for a trial, on either side of a case, the outcome is up to the jury or the judge.

A lawyer can pour through centuries worth of case law, revisit hundreds of trials, and put together a case that at the outset appears to be a surefire winner. But a judge or jury might turn around and find that the reverse is true: They might rule in favour of the plaintiff, no matter how strong the defence’s case is.

“The management of a legal case is not a scientific process,” Dunn says. “It has a human element, and judges and juries can and will do strange things.”

By way of example, Dunn notes that nobody would have ever believed a judge at first instance would award a man who found a fly in his water bottle more than $300,000. And yet a judge did just that in Mustapha v. Culligan of Canada Ltd. (Please refer to the June/July issue of Claims Canada for a full description of this case). “It’s those vagaries and those uncertainties that cause risk,” Dunn says.

A trial is the ultimate risk, because anything can happen. A witness presumed to be unimpeachable can fall apart on the stand or may go AWOL during the trial. The jury may excessively sympathize with a plaintiff who the insurer and defence counsel believed would be unsympathetic. Assumptions made prior to trial may turn out to be inaccurate. These are all risks of the trial process.

An insurance company does its best at the adjustment phase, in the analysis and at the working phase of a case prior to litigation — or in the early stages of litigation — trying to get all the background facts in order. But from a factual perspective, anything is possible; and no matter how prepared the legal team is, the decision ultimately rests with the judge.

“The ultimate arbitrator of the finite level of risk is a judge or jury,” Dunn says. “Until a judge releases a judgment or a jury renders a verdict, it’s a risk assessment process from beginning to end.”

Not to mention, no two cases are ever the same, which means that no two decisions are exact either. This makes determining a potential outcome that much more difficult.

It’s a double-edged sword with which insurance companies are dealing, Bruno DeVita a partner with Alexander Holburn Beaudin and Lang, says. A number of different cases have resulted in not particularly good law according to the perspective of insurers. Plus, there will always be claims-handing decisions that are incorrect to some degree — both on small and large cases.

The danger, Lee Samis, the principal of Samis and Co., notes, is that if a decision is reached in a small case, people will say that this is the law now and it must be applied to other cases. The additional danger is that if a decision is reached, some will say if it is not applied as law then there is a breach of duty or bad faith, which is another added dimension, Samis notes.

“In the end, the decision to settle has to be tempered by the notion that anything can happen at a trial no matter how secure you think your case is,” Dunn says. “A prudent risk management exercise accounts for the inherent risk of a trial.”

Decisions made by judges and juries can have long-term financial ramifications on insurance companies. Not only might they have to pay out a decision on one particular case, but a decision can create a landslide of class actions wherein the financial implications can be insurmountable.

Class actions

Class actions against insurers on a coverage issue is really essentially the law of large numbers operating in reverse.

“We use the law of large numbers to sell insurance,” Samis says. “Large numbers of people pay premiums, we share the losses, and therefore by paying a little bit for premiums, we can pay big losses when they occur.” With a class action, however, it’s the flipside. A large number of small losses or small claims can become a large liability for an insurer. The danger for insurance companies is that they have somehow been doing something wrong in a reasonably minor way.

“So that this little thing that is way below the radar screen out there in day-to-day claims handling becomes a problem of major proportions when it gets multiplied over thousands or tens of thousands of transactions,” Samis notes. “How sure are we that we are making the right decision on these small transactions, and what is the effect of a precedent on these small transactions?”

When it comes to class actions, the first thing often considered is the likelihood of certification.

When a matter is certified, the pressure to settle increases because the certification order essentially means there is no longer an individual action. Rather, the certified action involves the aggregation of a number of thousands or even millions of individual claims depending on the nature of the case, DeVita says.

There are options, however, for avoiding certification.

In a situation in which an insurance company feels it has a strong case — and it is questionable as to whe ther or not a cause of action exists — a strike application can be brought before the certification hearing. Although the courts are generally reluctant to interfere with the certification process, in certain cases the courts in British

Columbia have dismissed actions prior to certification either by way of summary trial or on the basis that no cause of action was disclosed in the pleadings, DeVita points out.

The plaintiff, on the other hand, will want to proceed directly to a certification hearing first: Obtaining certification puts them in a stronger position with respect to settlement.

But if the defendant feels it has a strong case, it can seek to have the merits of the case determined before the certification hearing. Essentially, if you nip the matter in the bud, it won’t proceed beyond that point.

“In other words, it doesn’t proceed to certification,” DeVita says. “You’ve then got a precedent and other individual claimants are going to be dissuaded from pursuing their claims because of that precedent. In appropriate cases, there’s little risk, in my view, in seeking a determination on the merits of the case before certification, because if you can avoid certification then you’re avoiding that key event which puts defendants into that very difficult spot of either facing extraordinary legal costs or settling for an amount maybe higher than they want to settle for.”

There are, however, instances in which an insurance company might want to proceed and fight the class action. In certain instances, particularly in which individual claims are sufficiently large to warrant the commencement of individual actions, an insurer might choose to try it as a class action in lieu of defending each case individually.

By having the matter heard as a class action when the defence has a strong case it can bind the entire class, and essentially the matter is over.

“Where you have a very strong legal position, you may wish to proceed to certification, have the matter certified

and indeed, perhaps, even consent to certification — although that’s not often done — and then take the matter to trial or take the matter to a summary trial, if that is possible” DeVita says. “In those circumstances, what happens is that the final judgment will bind the entire class and that way you essentially eliminate the entire problem.”

Making case law

There is, however, always the question of creating a precedent. Not only with a class action, but with the smaller cases and the appeal cases as well.

Quality control over the cases and the handling of the cases needs to be determined, including the way they are fought and the precedents they might establish.

While making case law is rarely the be all and end all, Dunn says, there are times when insurers approach his firm with the specific intent of making or clarifying the law on a point.

There are times when favourable precedent can be made with the support of a strong factual case in an area where case law does not currently exist.

“We are trial lawyers,” Dunn says. “In the end, our role is to try cases where the risk management exercise deems it appropriate to do so, and all are prepared to accept the risk.”

Inevitably, there is always the chance that no matter how strong a case may appear to be, an unfavourable judgment might be made which could forever foreclose an argument. But in situations like this, it might be necessary for the case to go to appeal for the sake of the industry and the players involved.

It is important to consider whether or not to appeal a “bad” decision. If a decision is made and an insurer decides not to appeal, a precedent will be set that has ramifications throughout the industry. To challenge these decisions, other insurers must wait until a case comes along that has a similar set of facts. Such a case would also have to make it up to the appellate court level.

Insurers need to have their eyes wide open and know when they are establishing a precedent. When insurers take this risk, they must have some understanding of the consequences surrounding an unintended outcome. On the chance that an unintended outcome occurs, insurers must recognize the ramifications and the implications for appealing or not appealing.

These ramifications might be far more important than the quantum of the issue in the particular case, Samis warns. But, he points out, you can’t put all your resources and fight every case like it’s World War II. There must be a balance.

“You’ve got to look at the economic picture,” Samis says. “It’s a bit bigger, or maybe a lot bigger, than the transaction you’re disputing.”

The ramifications of settling

Nevertheless, the implications of not appealing and simply settling a case far outweigh the economic side of things for John Campion, a partner with Fasken Martineau.

He notes one can never predict what a plaintiff lawyer might find when searching for a judicial decision that could allow them the opportunity to file a class action. Plaintiff lawyers appeared initially to have found a gem in McNaughton Automotive Ltd. v. Cooperators General Insurance Company.

In this case, an appellant’s vehicle was in an accident and damaged beyond repair. The Co-operators General Insurance Company paid the appellant the value of the vehicle, minus the deductible, and “took title to the damaged vehicle as salvage,” according to the Ontario Court of Appeal.

The appellant alleged that because it was a salvage, the terms of the policy required that The Co-operators pay “the actual cash value of the automobile,” with no reduction for the deductible. The appellant moved for judgment and for certification of a class action.

The Co-operators said there was no cause of action and that there was no claim against The Co-operators, Randy Bundus, vice president, general counsel and corporate secretary of the Insurance Bureau of Canada (IBC), says. But the appellant referenced a 1974 case in Alberta in which a small claims court judge ruled, according to Bundus: “If you apply the deductible, you’re not giving the insured person, the policyholder, the full value.”

The judge in the 1974 Mueller v. Western Union Insurance Co. ruled that insurance companies were wrong to take the salvage and the insured was not required to pay the deductible. That case went before the Queens Bench in Alberta and they agreed with the original trial judge. “We were totally shocked by that,” Bundus says of the 1974 decision. “We didn’t think it was good law.”

The case went no further, because a small claims court decision in Alberta cannot be appealed beyond the Court of Queen’s Bench.

This decision provided the backbone of the appellant’s case in McNaughton. However, a trial judge agreed with The Co-operators which said that the Alberta decision is not authority in Ontario. When a policyholder signs an insurance contract, they are agreeing that the insurer can reduce their payment by a certain deductible amount. It does not make any sense then, that there would be no deductible when the policyholder has agreed to the contrary.

“(The Co-operators) said if it’s a repair job you have to pay the deductible if you’re the policyholder, but if it’s a total loss you don’t have to pay the deductible? It doesn’t make any sense to anybody,” Bundus says. The trial judge agreed.

But when the case went before the Ontario Court of Appeal, the appeal court ruled the trial judge was wrong, based on a slight amendment in the law in Ontario. According to the appeal court, the amendment — including the provision that allows for the deductible — was made subservient to the provisions in the statutory conditions dealing with the vesting of salvage, Bundus said. It was ruled that insurers could not apply the deductible if they wanted to take the salvage.

The insurer sought leave to appeal the case to the Supreme Court of Canada was sought. But the high court declined to hear it.

“Then the floodgate s opened,” Bundus said. “Every insurer was either sued or soon to be sued.” The Dominion of Canada decided that the Ontario Court of Appeal had erred; took one of its cases through the system to see if the Court of Appeal would reverse the decision.

In David Polowin Real Estate Ltd. v. Dominion of Canada General Insurance Company, the trial judge ruled that he was bound by the Supreme Court of Canada and that’s the decision that had to be applied.

However, the Ontario Court of Appeal revisited the matter, with a five-member panel, and “for the first time that I ever saw in my entire life the Court of Appeal said, ‘you know what, we were wrong, we came to the wrong conclusion in the McNaughton case’,” Bundus said, noting that the Court of Appeal ruled that an insurance company can apply the deductible when they take the salvage.

In the middle of these goings-on, the statutory condition in Ontario’s auto insurance policy was amended to clarify that insurers could apply the deductible and keep the salvage.

Back in Alberta, a parallel case was making its way through Alberta’s courts. InPaulivACEINAInsurance it was ruled that the original salvage case, Mueller v. Western Union Insurance Co. was wrongly decided and the Court of Appeal agreed.

“The case in Alberta that led to the McNaughton matter being started in the first place was ultimately found to be bad law subsequently in the province of Alberta,” Bundus observes.

Had it not been for the Dominion of Canada General Insurance Company refusing to settle a case and, instead running it through the court system, nothing would have changed. Insurers would still be forced to pay the deductible in salvage cases, and would face class actions launched by plaintiffs seeking to reclaim their deductible.

“The idea of moving quickly into settlement, in my respectful view, is just completely wrong-headed,” Campion said of the lesson learned in Polowin.

“The way in which plaintiff’s counsel look at these actions does not make it easy to settle until (plaintiff’s counsel) feel the cold steel against their ribs of real war,” Campion told delegates attending the National Insurance Conference of Canada (NICC) meeting in Montreal, Que. “There is a need for strong, innovative defences in a very sophisticated field (of class action litigation) . . . This is not a game for those who are not experienced in the field.”

And if insurance companies continue to settle cases, there will be no defence lawyers qualified to fight in future, because they have not been given the courtroom experience opportunity that lawyers in the past were afforded, other defence counsel note.

The normal path for insurers is to settle, Campion says. And while this might be the sensible solution in some cases, it all too often becomes a default option.

“My experience is that plaintiff lawyers don’t like to fight merits,” he observed. “Many of these cases can and should be won (by insurers)… Every small decision, no matter how small, is highly significant for you.”

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“In the end, the decision to settle has to be tempered by the notion that anything can happen at a trial no matter how secure you think your case is.”